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The Pension Benefit Guaranty Corp.'s deficit hit a record $61.7 billion in fiscal 2014, the agency said Monday.
The deficit in the PBGC's insurance program for single-employer plans fell to $19.3 billion, down from $27.4 billion in fiscal 2013. But that decline was more than offset by a huge rise in the deficit in the agency's insurance program covering multiemployer plans, which jumped to $42.4 billion, up from $8.3 billion in fiscal 2013.
“The program's increased deficit is largely due to the fact that several additional large multiemployer plans are expected to become insolvent within the next decade,” the PBGC said in statement.
The PBGC did not identify the names of the multiemployer plans that it expects to fail in the coming years. But in congressional testimony last year, the executive director of one huge plan — the Central States, Southeast and Southwest Areas Pension Fund in Chicago, which in 2013 had $17 billion in unfunded benefits — said the plan was headed toward insolvency.
The Central States plan, whose employer members are in a variety of industries, especially trucking, “has reached a point where it requires legislative action to avoid insolvency,” Thomas Nyhan told the House Health, Education, Labor and Pensions subcommittee.
Numerous reasons have been advanced for the financial woes of multiemployer plans, especially a provision in a 1980 federal law that requires employers withdrawing from the plans to pay a share of the plans' promised but unfunded liabilities.
The fear of withdrawal liability is so great that underfunded plans have found it difficult to attract new employers to the plans, leading to a “death spiral,” experts say.
So far, though, there has been no broad-based move by federal lawmakers to address the plans' problems.
However, in the wake of the PBGC's report, Rep. John Kline, R-Minn., chairman of the House Education and the Workforce Committee, called for congressional action.
“The time to enact responsible reforms is now, before the bomb goes off,” Rep. Kline said in a statement.
On the single-employer side, the PBGC's news is better. During fiscal 2014, the PBGC took over 97 plans from financially ailing or failed employers, down from 111 in 2013 and 155 in 2012. It paid about $5.5 billion to participants in failed single-employer plans, about the same as in fiscal 2013.
In addition, the agency said its potential exposure to future pension loses from financially weak companies was about $167 billion in fiscal 2014, down from $292 billion in fiscal 2013.
Still, there are challenges facing the PBGC's single-employer program. One that has emerged in recent years is the move of employers to reduce the size of their pension plans by offering certain participants the option to convert their monthly annuity to a cash lump-sum payment and/or transferring benefit obligations to an insurer through purchasing a group annuity, as Motorola Solutions Inc. and Bristol-Myers Squibb Co. earlier announced.
“We are certainty keeping an eye on those deals,” a PBGC official said during a briefing Monday, referring to the so-called “de-risking” approaches utilized by a growing number of employers.
Either approach — lump-sum benefit offers or shifting liabilities through annuity purchases from insurers — means less premium income for the PBGC, which uses that revenue to help pay benefits to participants in failed plans the agency has taken over.
Still, PBGC premium revenue shot up to $3.9 billion in fiscal 2014 from just over $3 billion in fiscal 2013. A big reason for the hike in premium income was legislation Congress passed earlier that boosted the base premium paid by all plan sponsors and the variable rate premium paid by employers with underfunded plans.
When federal lawmakers passed the Employee Retirement Income Security Act in 1974, they put aside a key issue affecting a big slice of the pension universe: multiemployer plans.